Shares of HP Inc. (NYSE: HPQ) rose sharply on Friday after the California-based tech giant reported better than expected corporate results, easing concerns that a prolonged U.S.-China trade war would impact revenue.

 

Q2 2019 Summary

  • Earnings: $0.53 per share
  • Revenue: $14 billion

 

HP Delivers Positive Surprises

The stock is trading well below the 52-week high and is down roughly 3% this year.

HP’s quarterly earnings report exceeded analysts’ forecasts on both the top- and bottom-lines. For the quarter ending April 30, non-GAAP earnings were reported at $0.53 per share on revenue of $14 billion. Analysts had called for an EPS of $0.51 on revenue of $13.95 billion.

Revenues from the Personal Systems Group, HP’s largest segment, came in at $8.92 billion. That was slightly below forecasts.

Year-over-year, earnings were down 20%. Revenues were off slightly compared with Q2 2018.

“We continue to strike the right balance between driving results today and investing in innovation to deliver long term financial performance,” HP President and CEO Dion Weisler said during the earnings call late Thursday.

The positive earnings surprises allowed management to raise its adjusted EPS guidance for 2019 to between $2.14 and $2.21. Analysts are expecting a higher adjusted EPS for the year.
HP’s share price returned above $20.00 on Friday for the first time nearly three months. HPQ peaked at $20.18, where it was up 5.2%. The stock is trading well below the 52-week high and is down roughly 3% this year.
HP Share Price YTD - May 24 2019

Source: Yahoo Finance

Trade War Risks Kept at Bay (For Now)

Forbes reported earlier this week that the ongoing U.S.-China trade war could have adverse effects on HP’s underlying business, and that the Q2 earnings call would reveal the first evidence of spillover. Although that didn’t happen, HP’s notebook PC business is highly vulnerable to any tariff escalation.

So far, tariffs on Chinese goods have not impacted notebook PCs, but that could soon change as U.S. officials meet next month to discuss expanding their list of duties. If the U.S. does slap 25% tariffs on personal electronics, regions like Taiwan and companies like HP will be in the direct line of fire. That’s because HP will earn less on its PC sales if prices go up. It also means less money to spend on orders.

The trade war could also impact HP’s supply chain since Taiwanese firms like Quanta Computers build the company’s notebooks. And as Forbes notes, HP sources 90% of its parts from Taiwanese firms. Likewise, Taiwan makes up 90% of the world’s notebook production, based on 2016 estimates.

 

Conclusion

The United States and China appear to be no closer to resolving their trade dispute, putting companies like HP at risk in the near term. HP’s management appears confident that it can continue to deliver long-term financial success in the current market climate. The company’s dependence on Taiwan could become an issue should the tariff war between the two superpowers escalate.

Disclaimer: Author holds no investment position in HP at the time of writing.